Upcoming auction revives debate on new greenhouse gas regulation

A central component of the 2006 state law aimed at reducing California’s greenhouse gas emissions to 1990 levels by 2020, the state’s cap-and-trade program, will start to be enforced on Jan. 1.

But in just a few weeks, the program will face its first test, as the California Air Resources Board holds its first auction at which greenhouse gas-emitting companies will have a chance to purchase emissions allowances.

The upcoming auction, scheduled for Nov. 14, and the expected reaction from California companies through the cap-and-trade program’s lifespan through 2020, is going to draw attention as onlookers seek to deem the program a success or failure.

A panel of speakers met Oct. 23 at the fall meeting and environmental summit of the Industrial Environmental Association to discuss the implications of cap-and-trade, bringing forth implications of government overreach and defense of the program with hopeful optimism.

Under the plan, the carbon dioxide cap for 2013 was set at about 2 percent below the emissions level forecast for 2012. It will decline about 2 percent in 2014 and about 3 percent annually from 2015 to 2020.

The program requires large carbon dioxide emitters to hold enough permits, or allowances, to cover their emissions compliance obligations, determined by CARB.

Dorothy Rothrock, senior vice president of government relations for the California Manufacturers & Technology Association, takes issue with the auctions, which are scheduled to be held on a quarterly basis, being held at all.

A February report from the state’s legislative analyst noted that because of the cap on emissions, produced by putting in circulation a declining amount of allowances over time, all approaches to emissions allowance application, including that which would provide for 100 percent free allocation from the state, would “yield the same programmatic results in terms of GHG reductions.”

That finding is problematic for Rothrock, since the stated goal of AB 32 was to reduce greenhouse gas emissions to 1990 levels by 2020, not to raise revenue.

“AB 32 created a framework that CARB has been implementing to require us to reduce our greenhouse gas emissions,” Rothrock said. “It does not provide CARB, or anyone else, authority to impose fees or taxes beyond what was prescribed specifically in the law.”

But even if the fees are legal, Rothrock said, CMTA contends that they’re unnecessary to achieve the goals of AB 32, citing the LAO report.

“You can do a cap-and-trade program that provides, basically, all free allowances up to a declining cap, and (still) achieve your goal.”

She asked what the purpose was of raising revenue, suggesting that the auctions were a mechanism of greed rather than need.

Tim O’Connor, director of the Environmental Defense Fund’s California Climate and Energy Initiative, said the purpose of auctioning off some portion of the permits as a revenue generator is not to take money away from business, but to drive efficiency while raising money for programs that promote that goal.

“Nobody in the (non-governmental organization) community wants this program to be on the backs of California manufacturing and California businesses going away,” O’Connor said. “What we would like to see is a program that really works, that gets maximum participation for reducing emissions, for incenting innovation.”

The legislation allows five broad categories as permissible expenditures for auction revenue, including renewable energy and energy efficiency, low-carbon transportation and infrastructure, natural resource protection, research and development and empowering local leadership climate change planning and implementation.

Aside from the debate over the legality or necessity of the program’s revenue-raising functions, but still connected to those functions, is the concern from businesses over how the cost of buying allowances will affect their bottom lines, and whether the effect will be great enough to encourage businesses to shift operations out of state — an effect referred to as “leakage.”

In implementing cap-and-trade, CARB was required to minimize leakage to the extent possible, and has identified the industries most at risk for leakage, instituting a varying level of emissions allowances provided free of additional charge by the state based on that risk level.

In doing so, the state applies industry assistance factors to companies needing to comply, providing 100 percent assistance to those companies in the highest leakage risk category through the compliance period, which ends in 2020, and a declining assistance to medium- and low-risk companies over time, starting with a 100 percent assistance for the first compliance period of 2013-2014.

During the second compliance period of 2015-2017, those companies in the medium risk group would then be responsible for purchasing 25 percent of their needed allowances, up to the cap, while those in the low-risk group would be responsible for 50 percent.

Between 2017 and 2020, the medium risk group will be responsible for purchasing 50 percent and the low risk group 70 percent of needed allowances

When the program is fully operational, approximately 350 of the state’s largest emission sources, collectively referred to as “capped sectors” and accounting for about 80 percent of the state’s carbon dioxide emissions, will be covered entities, including oil producers, refiners, electricity generators and some other large industrial entities.

If leakage does occur in large numbers, the program will not survive, O’Connor said.

A member of CMTA and the environmental health and safety director at Solar Turbines, Craig Anderson said neither finding ways to reduce emissions or buy up future permits at reduced rates provides a solid outlook for his company’s future.

“We got a very favorable benchmark from the Air Resources Board, as far as emissions go, because we’re the only business that makes gas turbines in California,” Anderson said.

The problem, he said, is that Solar Turbines has very little it can do to reduce its emissions as the free allocation amounts dwindle over time.

Placed in the medium leakage category, Solar Turbines produces few emissions from its turbine production.

Instead, its emissions come primarily from the testing of product, which Anderson said provides the company little wiggle room without some major change occurring in technology outside of Solar Turbines’ product.

“Our customers want to make sure they work,” Anderson said. “They cost a lot of money, they’re gonna stick them on their natural gas pipelines, they’re gonna put them on their offshore platforms, and this is all about safety.”

From the business perspective, he added, the issue of where the money from auctions goes isn’t a concern.

The worry, he said, is the uncertainty of whether enough allowances will be available through auction, and the uncertainty with regard to the price of the allowances on the secondary market.

“We already have our business plan in place for 2017,” Anderson said. “So two years to ease into this is like snapping your fingers. The benchmark was one thing. It’s the leakage that’s really gonna drive the behavior of businesses in California.”

Without going so far as to say the company is considering leaving the state, Anderson said Solar Turbines will evaluate its options as it sees the cap-and-trade program unfold.

Rothrock said one of the biggest concerns with regard to the revenue, aside from the LAO determination that there is no need for them to be raised to meet AB 32 goals, is that the state legislature, not CARB, will be in charge of determining where the money goes.

“Hopefully there will be recognition of where the money really should be going, but I think politics is going to drive it,” Rothrock said.